Title: ING Bank N.V vs. CIR G.R.

167679 July 22, 2015

Ponente: J. Leonen

Doctrine to Remember

Facts
 Petitioner is a foreign banking corporation incorporated in the Netherlands and duly authorized by the
Bangko Sentral ng Pilipinas to operate as a branch with full banking authority in the Philippines.
 The petitioner received Final Assessment Notice from the BIR for taxable years 1996 and 1997,
among others, deficiency withholding tax on compensation.
 BIR contended that the bonuses recognized in years 1996 and 1997 as an expenses shall not be
deductible because the relative withholding taxes have not been deducted and paid to the BIR
pursuant to Section 34(k) of the NIRC.
 On the other hand, petitioner invoked that while the bonuses were recorded in 1996 and 1997 they
were paid on a subsequent year. Hence, corresponding withholding tax should be withheld upon
payment.
 CTA denied the petition for lack of merit.
 Hence, this petition

Issues Articles/Law Involved

I. Whether petitioner is liable for deficiency Section 34(K)
withholding tax on accrued bonuses for
the taxable years 1996 and 1997
Rulings
I. YES. An expense, whether the same is paid or payable, "shall be allowed as a deduction only if it is
shown that the tax required to be deducted and withheld therefrom [was] paid to the Bureau of Internal
Revenue.

Section 34(K) of the NIRC Additional requirement for deductibility of certain payments. — Any amount
paid or payable which is otherwise deductible from, or taken into account in computing gross income for
which depreciation or amortization may be allowed under this section, shall be allowed as a deduction
only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the
Bureau of Internal Revenue.

Under the National Internal Revenue Code, every form of compensation for personal services is subject
to income tax and, consequently, to withholding tax. The term "compensation" means all remunerations
paid for services performed by an employee for his or her employer, whether paid in cash or in kind,
unless specifically excluded under Sections 32(B) and 78(A) of the 1997 National Internal Revenue Code.

The tax on compensation income is withheld at source under the creditable withholding tax system
wherein the tax withheld is intended to equal or at least approximate the tax due of the payee on the said
income. It was designed to enable (a) the individual taxpayer to meet his or her income tax liability on
compensation earned; and (b) the government to collect at source the appropriate taxes on
compensation. Taxes withheld are creditable in nature. Thus, the employee is still required to file an
income tax return to report the income and/or pay the difference between the tax withheld and the tax due
on the income. For over withholding, the employee is refunded. Therefore, absolute or exact accuracy in
the determination of the amount of the compensation income is not a prerequisite for the employer’s
withholding obligation to arise.

It is true that the law and implementing regulations require the employer to deduct and pay the income tax
on compensation paid to its employees, either actually or constructively.

Compensation is constructively paid within the meaning of these regulations when it is credited to the
account of or set apart for an employee so that it may be drawn upon by him at any time although not
then actually reduced to possession. On the other hand, it is also true that under Section 45 of the 1997
National Internal Revenue Code (then Section 39 of the 1977 National Internal Revenue Code, as
amended), deductions from gross income are taken for the taxable year in which "paid or accrued" or
"paid or incurred" is dependent upon the method of accounting income and expenses adopted by the
taxpayer.

Reading together the provisions of the NIRC, the SC hold that the obligation of the payor/employer to
deduct and withhold the related withholding tax arises at the time the income was paid or accrued or
recorded as an expense in the payor’s/employer’s books, whichever comes first. Petitioner ING
Bank accrued or recorded the bonuses as deductible expense in its books. Therefore, its obligation to
withhold the related withholding tax due from the deductions for accrued bonuses arose at the time of

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accrual and not at the time of actual payment.